Why The Hell Do We Have Markets Now In The NHS?

A NOT uncommon question: why the hell do we have markets now in the NHS? Given that everything is being paid for by the taxpayer, shouldn’t we have the politicians, those representatives of the taxpayer, organising and running the NHS? Why should we let some private firm come in and skim some profit out of such a vital national resource?

The answer comes from something very few understand. Here’s a complaint about how much money the NHS needs as against how much it is getting:

The insatiable growth of the NHS’s demands for cash have never been more graphically illustrated than under the present government. Though “ringfenced” from the coalition’s spending cuts, the NHS is widely believed to be deteriorating to the point of collapse because it needs an annual budget increase of at least 4% (in real terms) to meet rising expectations. It probably needs more, as cuts in care services put extra burdens on GPs and hospitals.

It’s not so much rising needs as something called “Baumol’s Cost Disease”. The real costs of health care are the wages of the people who provide the health care. Yes, there’s drugs’n’stuff but they’re about 10% of the budget. It’s really the costs of the doctors and nurses and home helps and all the rest of it that make up the bulk of the NHS budget. And, over time, people’s wages generally go up as the society as a whole gets richer.

But, and here’s the catch, society getting richer is the same thing as saying that productivity is rising. That is, for the same input of resources it’s possible to get higher output. And our problem is that this rising productivity is much easier to achieve in manufacturing than it is in a service. And, yes, health care is a service, something we can prove by pointing out that most of the cost of it is peoples’ wages. So, if wages are rising across the economy, and productivity is rising in manufacturing faster than it is in services, then services will gradually become more expensive relative to manufactured things. This is that cost disease.

So, we expect the NHS to get ever more expensive over time precisely because the society as a whole is getting richer and peoples’ wages are rising. OK, maybe not in the past few years but over the decades.

We also know on more thing about this productivity lark. Which is that market based systems improve productivity more than planned systems do. There’s still the same difficulties over services and manufacturing, but market based systems drive productivity upwards more quickly for both sectors. Thus, if we’ve got a planned system, like the NHS, and we’d like productivity to improve more quickly than it currently does, then we’d like to move that planned system over to a market system.

And that, really, is why it is being done. It is exactly because the NHS has a higher inflation rate than other parts of the economy that we want to turn it into a more market based system.